Now that Apple has confirmed its $3 billion acquisition of Beats Electronics and Beats Music, most people agree that it must be Beats’ streaming service that Apple is after. Not only has iTunes Radio, Apple’s own streaming service, failed to make an impression, but music downloads, a market created and led by Apple, are on the decline. A Morgan Stanley research note supplies more evidence that Apple’s iTunes business could need a fresh coat of paint. According to the data, Apple’s customers spend less and less money in the iTunes Store. The average user spent $1.90 on iTunes in the first quarter of 2014, down from $2.90 a year ago and from $4.30 in Q1 2012.
While Apple probably doesn’t care too much about the lost revenue, they do care about something else: if consumers spend less money on iTunes, it probably means they’re getting their music fix from some other service. That in turn poses a real threat to Apple's hardware business, because Apple wants people to rely (and ideally depend) on its services in order to keep them locked in their ecosystem. An iPhone owner using iTunes Match to have his music library readily available in the cloud is less likely to switch to an Android phone than one who listens to music using Spotify. Thinking of it this way, a well-designed streaming service fully integrated with iOS devices could do wonders for Apple’s iPhone business.